Here is the full transcript of financial advisor Shannon Ryan’s talk titled “Confronting Your Financial Scar Tissue” at TEDxManhattanBeach 2022 conference.
Listen to the audio version here:
TRANSCRIPT:
The Impact of Financial Scar Tissue
As a certified financial planner, I have had the front row seat to the financial lives of hundreds of individuals and families. What I have learned is that we all carry financial trauma from our past. I call it financial scar tissue. And it impacts our decisions every day.
In our bodies, scar tissue remains long after a wound has healed. And the same is true for financial wounds. What are financial wounds? Well, they come in a lot of different forms.
It could be remembering your parents arguing over bills, losing your job, a divorce, experiencing a bankruptcy, living through a recession, being hungry, not having the cool clothes or the cool shoes to fit in, or just wanting something or an experience so badly but not having the resources for it. These invisible wounds define our many thoughts.
And then they create behavior patterns in our lives that actually stop us from achieving our financial goals and, more importantly, financial satisfaction. True financial success comes when we can first identify what has caused this financial scar tissue and then understand how it is impacting our daily recurring financial decisions.
David’s Story
Early in my career, I did a financial planning meeting with a man named David. He was 32 at the time. And when he came into my office, he said that his number one goal was retirement planning. And then he told me why.
His parents, they were retired, living solely off of Social Security and, frankly, having a really tough time making ends meet. He said that they had once dreamt of retirement travel, but today watched news and Netflix and just stayed home.
And in David’s words, “waiting to die.” David wanted a different life for himself, but he knew he’d have to start early.
And he’d done a good job. As I went through all of his paperwork, he had a cash reserve, he had paid off all debt, and he had $60,000 in his 401K. We went through a planning process, created a cash flow plan with an eye towards retirement. About six months after that initial planning meeting, I gave David a call.
“David, it’s Shannon. How is the planning going?” Before he answered, there was a long, unsettling silence on the other end. “Hey, Shannon. I bought a car.” Huh. I thought to myself, gosh, when we did the planning, he wanted a new car, but his car was running well. And he said that he was going to save money for the next car, but he bought a car.
“Okay. Great, David. How did you finance it?” “I used my 401K.”
My heart sank. And then I proceeded to ask him how much he had actually taken. He had withdrawn the entire $60,000 from the 401K, unbeknownst to me. After he and I met, he had actually taken his financial plan to his parents.
He was excited. His parents were clear. “You are too young to be worrying about retirement. Enjoy life. Live a little bit.” It did not help that his friends weren’t saving for retirement. In fact, they were accumulating debt. David’s peers and his parents had a direct impact on how David thought about saving and spending money.
So what? He’s 32. What did this really cost David? Well, there was really two costs. There was the initial cost. David took $60,000 out of his 401K. He needed to pay state and federal taxes. In his state, it was 22%.
Because he was under 59.5, he also needed to pay a penalty of 10%. David owed 32%, or $19,200 on that withdrawal. He cleaned out his cash reserve because he hadn’t prepared for that cost. However, that was just the immediate cost.
The long-term cost was his retirement. When he came into my office, we did a retirement projection. In that projection, we made some assumptions. The first one was he was saving $200 a month pre-tax.
He had $60,000 in his 401K, earning about 7%, and Florida was matching. We took it out to age 65. He would have had $1.2 million if he continued on that same path. After he purchased the car, he came back to the office and said, “No, really, retirement is so important to me.”
I said, “Okay, no problem, let’s do a reprojection.” He was still willing to save the $200 a month pre-tax, but now he had zero in his 401K. He was starting fresh. Same projections, same assumptions, 65, $623,000.
That is a $577,000 difference. That is an expensive car. Financial scar tissue is how a young professional who knows exactly what he wants sabotages his own financial goals. What we say about money, first to ourselves, and then to each other, it matters.
Joe and Wendy’s Story
Then there are my clients, Joe and Wendy. They are retired. They have saved well to have a very comfortable retirement income. However, they cannot bring themselves to spend money.
They are always waiting for something to compromise their financial position. Joe and Wendy have grandkids on the East Coast, and they so badly want to buy plane tickets to fly from California to the East Coast to visit them, but they won’t buy the tickets. Would it surprise you to learn that Joe grew up in a family where his parents lost everything in the Great Depression, and the family was always preparing for the next financial disaster? As I was getting ready for TED, I would write what I was going to say, and I’d come home at night and I’d read it to my husband, Chris.
One evening, as I read my opening to him, Chris became a little teary. Of course, my first thought was, “Oh boy, this draft is really bad,” but I soon realized that wasn’t the case. Earlier that day at work, Chris had sent an email, and right when he went to send the email, he thought, “Oh man, that was too curt,” and he started a negative thought loop in his head. “If I don’t win this business, then I may lose my job.
If I lose my job, we as a family can’t do the things we want to do financially. I’m going to disappoint all the people I love.” Chris had been tied up in this negative thought loop all day long. Chris’s father, at the age of 35, with six kids, left a corporate job to be a wallpaper hanger.
They had no assets. That means they had no money. Chris distinctly remembers growing up without the name brand shoes that the other kids had, and asking friends in school for lunch money so he can eat. Today, Chris is a top performer in his industry.
Frankly, his financial advisor has been clear with him. He can retire in the next couple of years if he wants to, but Chris’s deeply entrenched fear, his scar tissue, is that our girls will be hungry as he was. Society’s expectations around money, home ownership, get the right job for the right income, to have the right lifestyle, have added to our emotional financial scar tissue and trauma. Social media has created an online currency of likes, influencers, and curated imagery.
The Importance of Personal Narratives in Financial Literacy
How is this affecting our lives? Is it impacting how we think about money? I teach financial literacy, so I hear all the time, “Shannon, this is such an important topic, it has got to be a class. In fact, it should be mandatory curriculum for our students.”
Tonight, not now, tonight, when you get home, Google your favorite financial literacy topic or “top 10 ways to be financially successful.” What you are going to find is hundreds, if not thousands of articles, save, have cash reserved, pay off your debts, contribute to your 401K, what is a stock, what is a bond, how to invest. It is exhausting. So why?
Why are we, as a society, not more financially literate? Because rational financial common sense is no match for the financial scar tissue that we all carry inside of us. To teach financial literacy, we must incorporate personal narratives. And we can do it really simply by asking one question, “What is important to you financially and why?”
If you dare to be honest with yourself and really transparent, you may have a money worry, hesitancy, or a memory that pops up. My guess is this may be your financial scar tissue. I knew if I was going to help Joe and Wendy achieve their dream of flying from California to the East Coast to see their grandchildren, that I was going to have to prove to Joe and Wendy with hard evidence that they could do that without compromising their financial security. I went as far as to model the S&P 500 and when it dropped in ’08 of negative 38%, they were still able to buy the tickets to go to the East Coast.
Joe continues to worry and I think he always will. But when Joe and Wendy come to my office today, they are happy and all they can talk about are those visits to Washington, D.C. to see their grandkids. In the case of David, he took his money out of his 401K and bought a car.
That was in the past. But not all is lost. When David came into my office, we re-projected his 401K as I shared with you and he made a decision to double down. “I’m going to put in $400 months pre-tax versus $200.”
By doing that, still zero, he still cleaned it out, he was now at $1,040,000. Not the $1.2 million, but better than the $623,000. But that wasn’t all. David really needed to also work on his scar tissue, so he has continued to be very careful about what he discusses with his parents and his friends.
He also has become very disciplined and it’s not necessarily fun to run the numbers of a decision before he makes it, to make sure that it’s in alignment with ultimately what he wants. The future re-imagined to me is financial literacy that integrates our personal narratives and addresses our financial scar tissue. Only then can we break free from the behavior patterns that keep us from making sound financial decisions and find some financial satisfaction and maybe a little financial happiness. We’ve all heard the saying, “money talks.”
I’m going to counter that today with how we talk about money to ourselves, to our children, and in our community, it matters more. Thank you.